Details of seven complaints investigated by the Financial Ombudsman Service stress the importance of accurate Risk Tolerance Assessment

They serve as a timely reminder to both investors and advisors of the need to properly and accurately assess attitudes to risk as part of the investment advice process

Tim Myatt PhD
Author Tim Myatt PhD
Date 28th July 2013

Last week, as indicative examples of its rulings, the Financial Ombudsman Service (FOS) released details of seven decisions relating to the assessment of attitudes to risk. They serve as a timely reminder to both investors and advisors of the need to properly and accurately assess attitudes to risk as part of the investment advice process, and that heavy fines are levied against those who fail to follow regulatory guidelines.


In five of the seven cases made public, the regulator upheld the complaints and found in favour of the consumer. You can find more information about each of the complaints here.

Below we consider the implications of the complaints for ‘Know Your Customer’ and offer suggestions where Oxford Risk’s products and services might have helped.


Complaint 1:

Consumers said they wanted low-risk investments only, but were advised to invest in high-risk funds: Complaint upheld.

In this case, a couple in their sixties sought advice on whether they could retire. They had already decided to move to a smaller home, and invest the £75,000 surplus they had made as a result of their downsize. They told the advisor that they only wanted to take a small amount of risk – and that they wanted to use the growth from their investment to supplement their income. Their advisor helped them put their money into a range of investment funds, but after two years the couple worried when they saw that their investments had lost value. They contacted their advisor who said that the investment had lost value because the value of shares on the stock market had fallen.

When the FOS assessed the evidence, they noted that the couple had been looking for significant growth to supplement their income. The FOS concluded that in order to achieve this sort of return, they would “probably have needed to take on more risk than they had told the advisor they were prepared to take,” and upheld the couple’s complaint.

This situation is typical: the investors’ expectations, low risk but high growth, were unrealistic. The advisor should have made this very clear and illustrated the choice facing the customer, who could opt for high growth or low risk, but not have both. A failure of communication left the advisor, who probably thought he was acting in the customers’ interests, culpable.

Oxford Risk is developing an Active Profiler that will show investors the likely consequences of their risk preferences and investment options, allow them to ‘flex’ those preferences and investments for different objectives, and clearly indicate and record the level of risk the customer was willing and able to take.


Complaint 2:

Client complained he was wrongly advised to invest in high-risk funds: Complaint rejected.

In this example a client sought to invest £150,000 he had just inherited. He approached an Advisor who asked detailed questions about his personal circumstances and his attitude to investment risk. On the basis of the answers that given, the advisor told the client that his attitude to risk had been categorised as “adventurous” and sold him appropriate investments. However the investments did not perform as well as the client had hoped, and he complained to the financial advisor. He said he was concerned that the funds were too risky – and that he had made it clear that he had a “medium” attitude to investment risk.

During the FOS’s investigation they examined records that showed that the advisor had asked his client a number of psychometric questions, answered on a Likert Scale. The Ombudsman found that on the basis of his client’s answers the advisor had recommended suitable investments, and rejected the complaint.

The decision emphasises the need for accurate record keeping by the advisor in order to protect their interests when challenged. The Oxford Risk Rating Online uses psychometric questions answered on a Likert Scale, and stores a comprehensive record of results, comments and agreement between the advisor and the investor as part of their online and downloadable Report.


Complaint 3:

Consumer complains that he was advised to take out higher-risk investments than he had wanted: Complaint upheld.

When the FOS looked at the detail of the investments sold, and compared them with the advisor’s notes about the client’s attitude to risk – the Ombudsman was satisfied that the advisor had taken more risk with the client’s money than they had indicated they wanted to take.

It is the case that the advisor knew the investors Risk Tolerance Category but still advised unsuitable investments for that category. FOS accepted that the advisor had used a computer-based selection tool that was used commonly across the investment world, but took the view that the advisor had still been responsible for making sure the funds were appropriate.

To help the advisor, Oxford Risk has developed Time Dimensioned Risk Tolerance, which calibrates Risk Tolerance Categories to real investor preferences, expressed for actual levels of risk over various investment time horizons. This gives advisors a more nuanced appreciation of the investor’s risk preferences when recommending suitable investments.


Complaint 4:

Client complains he was wrongly advised to invest in a portfolio bond by his bank: Complaint rejected.

This complaint was rejected because the advisor followed an adequate process, recorded the customer’s preferences accurately, and recommended a suitable investment. As well as showing that the Ombudsman protects not only the investor who has been mis-sold an investment, but also advisors whose recommendations meet the required standard. The bank’s process-driven approach, and accurate and reliable record keeping were key to the advisor successfully refuting this claim.


Complaint 5:

Consumer complains that he lost money on a savings policy – and that he didn’t need the life cover that was included: Complaint upheld.

A young man had taken out a building society policy to save some money each month in order to guarantee a safe return. When the policy matured he received far less money than he had paid in and asked the FOS to investigate. The ombudsman found that his money had been invested in very cautious funds, which had not been affected much by fluctuations in the stock market. However, the building society had used money from the policy to cover the cost of the life cover it had provided. The FOS found investor was sold life cover he didn’t need or want, and that the cost of the life cover – and other charges that had applied to the policy – had made it very difficult for the investor to get a decent return on his investment.

One might speculate as to the reasons for this case (was there more profit in selling insurance?) but this is a clear case of a cautious and inexperienced investor being misled by unsuitable advice.


Complaint 6:

Consumers complain they were advised to cash in a with-profits bond and invest in a high-risk fund: Complaint upheld.

In this case the Ombudsman upheld the complaint of two retired individuals because the advisor at their bank had not kept adequate or accurate records of their discussions. It also found that the advisor had even completed some of the paperwork on behalf of the investors, without their knowledge.

Unlike complaint 4 above, this bank’s lack of accurate and reliable record keeping were contributory to their culpability.


Complaint 7:

Consumer complains about unexpectedly low returns on his policy: Complaint upheld.

In this case an investor was putting some of his extra earnings over ten years into a savings policy. When the policy matured, the investor only got back £100 more than he had paid in. The FOS noted that the charges the company had applied meant that the policy would have needed to grow quite significantly each year just to return what the investor was paying in. It would have needed to grow even more if it was going to give him a worthwhile return. There was therefore a very good chance of little or no return on the money he paid into the policy, and the investor should not have been advised to put his savings into this policy.

This complaint is similar to 5 above; was there more profit in selling a ‘policy’ rather than a suitable investment?


Oxford Risk’s suite of bespoke and off the shelf tools can be used by Advisors to reveal the level of risk investors are willing and able to take with their investments. The Oxford Risk Rating Online is a new web-based platform for our most advanced investor risk profiling tools. The Oxford Risk Rating Online is suitable for individual IFAs, networks of advisors, integrated providers, and multinational organisations.

To get in touch for more information and a free trial of our online profiling platform, click here


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